Ripple effects of COVID-19 on China’s plan to link continents

A report by Economist Corporate Network, supported by Baker McKenzie and Silk Road Associates, shows that the ripple effects of COVID-19 are affecting the nature, pace and scope of China’s Belt and Road Initiative (BRI) activity in Africa, mostly for the short term.

The BRI Beyond 2020 report also explains how the virus has led to an increased interest in digital programmes in BRI countries, as well as a heightened focus on sustainability, including workforce health. The BRI is China’s multi-billion-dollar plan to link Asia, Europe and Africa.

“The COVID-19 epidemic definitely has a dampening effect on BRI activities as Chinese companies focus their resources and efforts on dealing with the various types of impact caused by such epidemic. However, this effect will likely be relatively short term and we are already seeing the resumption of BRI activities by our Chinese clients. It is also heartening to see foreign sellers and partners adjusting their deal timetables to make allowances for the impact caused by this epidemic,” says Bee Chun Boo, M&A Partner at Baker McKenzie in Beijing.

Ben Simpfendorfer, CEO of Silk Road Associates, explains in the report that the BRI will remain a priority for China, but that it will affect the Chinese government’s short-term and long-term response to COVID-19, because shortfalls in China’s health sector, and the economic fallout for the country’s financially challenged SME sector, will divert official attention and resources away from BRI over the next 12 months and potentially longer.

“This may mean reduced investments into BRI’s smaller, less critical markets where the opportunities to connect such investments to the global supply are limited. Central Asia, Sub-Saharan Africa, and Eastern Europe will accordingly see a short-term dip in BRI related activity, relative to Southeast Asia. The exception to this view is where China seeks to share its valuable experience of battling COVID-19 with other BRI countries,” he says.

Healthcare

Mike van Rensburg, Partner and Head of the Healthcare and Pharmaceuticals Sector at Baker McKenzie in Johannesburg, notes: “Any large-scale outbreak of COVID-19 in Africa will put pressure on already strained public health systems in the continent and as such African nations are being vigilant in order to contain the spread of COVID-19. Detection of the virus in African has been challenging due to lack of laboratory capacity and medical supplies, but World Health Organisation (WHO) has said it is equipping countries with virus testing kits, and that it has helped to train and provide personal protective equipment to health workers. Further, most African countries are identifying quarantine centres and stocking up on medication.”

The outlook is far from bleak, however. The report highlights that one key area of potential for the BRI is in projects focused on strengthening the health systems of low-income countries, even if focused on soft processes rather than hard infrastructure.

It points to Chinese tech companies such as
Alibaba’s DingTalk, Tencent’s WeChat Work and Huawei’s WeLink potentially
bidding for market share outside of China, especially in the BRI region.
China’s MedTech sector may similarly find opportunities abroad. Online doctor
consultation platforms have seen consultations soar in the past few months
(Alibaba Health, Ping An Good Doctor) and similar technologies may work abroad
if staffed by locals, given health sector shortfalls in many BRI countries.

Simpfendorfer notes that China’s success in
using AI and other technologies to identify and monitor virus carriers may also
have application across the BRI, including in Africa.

Infrastructure

The report further outlines how, in the
years before COVID-19 struck, China had increasingly become an important
stakeholder in Africa’s infrastructure development. In recent years, there has
been a notable shift in the pattern of China’s overseas direct investment in
the region, with a repositioning of its focus from the mining sector to
Africa’s construction, manufacturing and financial services sectors. These
investments have been supporting Africa’s efforts to diversify its economy and
reduce its over-reliance on natural resources for growth.

Political and policy commitments between
China and Africa have strengthened and expanded in their scope since the BRI
was launched, the report shows. During the 2018 Forum on China Africa
Cooperation (FOCAC), an official forum between China and all states in Africa,
Xi proposed eight major areas for nations to collaborate on: industrial
promotion, facility connectivity, trade facilitation, green development,
capacity building, health and hygiene, humanities exchanges, and peace and
security. Since then, there have been further announcements signalling
continued interest to deepen this bilateral relationship, including a desire
from African nations to leverage on the BRI.

In August 2019, the Southern African
Development Community (SADC) affirmed its plan to link the BRI with its
industrialisation strategy, especially on the construction of infrastructure.
These developments build on the foundations that were established over the past
decade.

Further, the report shows how Chinese
companies have supported the construction of three major economic zones in
sub-Saharan Africa, including Zambia-China Economic and Trade Cooperation Zone,
Eastern Industrial Zone in Ethiopia and China-Nigeria free trade zone. Such
investments have been helping to create jobs and develop local industry.

Trade

Trade between China and Africa has also
been thriving. In 2018, China’s trade with Africa increased by 19.7%, a pace of
growth that is considerably higher than China’s average trade growth with the
world (12.6%), the report indicates.

The report shows how these strengthening
trade links are in part a result of favourable financial incentives offered to
Africa by China. Thirty-three of the poorest countries in Africa export 97% of
their exports to China with no tariffs and no customs duties. Bilateral trade
is still heavily centred on China’s import of Africa’s natural resources.
Nevertheless, in recent years China has modestly increased its import of
manufacturing products from more diversified economies such as South Africa.

Virusha Subban, a Partner specialising in Customs and Trade at Baker McKenzie in Johannesburg, points out, however, that “as one of Africa’s biggest trading partners, the effects of COVID-19 in China have already been felt in the continent. With China having shut down its manufacturing centre and closed its ports, there has been resultant decrease in demand for African commodities. Importers in China cancelled orders due to port closures and as a result of reduction in consumption in China. Sellers of commodities in Africa were forced to offload products elsewhere at a discounted rate.

“Over three-quarters of African exports to the rest of the world are still heavily focused on natural resources and any reduction in demand impacts the economies of most of the continent. Countries such as the DRC, Zambia, Nigeria and Ghana are significantly exposed to risk in terms of industrial commodity exports, such as such as oil, iron ore and copper, to China,” she notes.

Subban explains that the impact of COVID-19
will also be felt in the manufacturing sectors. Because China is part of the
global supply chain, factory closures raised the risk of supply chain
disruptions for multinational companies with delays, raw material shortages,
increased costs and reduced orders affecting manufacturing plants around the
world, including in Africa. As production lines and factories begin to reopen
in affected regions, imports and exports will be further delayed by the
resultant congestion and backlog.

“External imports from outside of Africa account for more than half the total volume of imports to African countries, with the most important suppliers being Europe (35%) China (16%) and the rest of Asia including India (14%). The manufacturing and industrial sectors in Africa have been impacted by a decreased supply of key components from China (and other relevant countries affected by COVID-19).

Although Africa’s untapped manufacturing
and consumer markets represent significant potential opportunity, the short
term impact on China’s investments in Africa after COVID-19 will be further
constrained by the challenges inherent in the region’s business environment.
The report lists poor governance, currency risks, complex regulatory systems
and high levels of corruption as issues that will continue to pose hurdles to
investment. To navigate the market opportunities, companies—from China and
elsewhere—will need to be fully prepared and equipped to deal with potential
legal and regulatory disputes in Africa.

African nations are also hoping that once
the African Continental Free Trade Area (AfCFTA) is implemented (due to take
place in July this year but now postponed due to COVID-19) intraregional trade
in Africa will decrease the continent’s reliance on foreign investment.

Wildu du Plessis, Partner and Head of
Africa at Baker McKenzie in Johannesburg, says that according to research from
Baker McKenzie and Oxford Economics – AfCFTA’s $3 trillion Opportunity
– there is a vast infrastructure gap in Africa, including transport and
utilities infrastructure, which must be urgently addressed so as not to
restrict increased trade integration.

“AfCFTA is expected to act as an impetus
for African governments to address their infrastructure needs as well as to
overhaul regulation relating to tariffs, bilateral trade, cross-border
initiatives and capital flows. Both domestic and foreign trade, including with
China, will benefit from reforms to regulation, political climate and trade
policies that enhance competitiveness and improve the ease of doing business,
but effective solutions will take time.”

Sustainability

If the BRI is to remain a major force
in global infrastructure development after COVID-19, sustainability will have
at the heart of its projects. According to the report, the definition of BRI
sustainability is also by necessity growing to encompass a focus on protecting
the health of those involved in BRI projects, including both workers and the
wider local populations where projects are underway.

And as Africa reduces its over-dependence
on natural resources for boosting economic growth, it also needs to ensure it
develops other industries in a sustainable way. To this end, the report
outlines how China and Africa have agreed to work together on improving
Africa’s capacity for green, low-carbon and sustainable development, and to
roll-out more than 50 projects during 2019-2021 on clean energy, wildlife
protection, environment-friendly agriculture and low-carbon development.

Du Plessis adds, “While the impact of
COVID-19 on African economies will be detrimental, there is light at the end of
the tunnel in that the project delays are expected to be mostly short term; and
future initiatives will now have a heightened focus on sustainability –
improving not only their long-term outlook, but also the sustained health of
the environment and, most importantly, Africa’s people.

Babalwa Bungane is a content creator/editor for ESI Africa - Clarion Events Africa. Babalwa has been writing for the publication for five years. She has a great interest in social media due to its advantage of disseminating content.